Volatility-linked ETFs tied to Wall Street’s “fear index” were this week’s best performers on worries U.S. leaders won’t be able to hash out a deal to prevent the economy from falling over the so-called fiscal cliff.
Still, the major U.S. stock indices were on track for weekly gains despite Friday’s sell-off, which was triggered by news House Republicans nixed the fallback “Plan B” bill tied to fiscal cliff negotiations. Investors are worried Washington won’t be able to reach a compromise before the year-end deadline, which would trigger automatic spending cuts and higher taxes that could push the economy into recession.
In Friday afternoon trading, the S&P 500 was on track for a 1% weekly gain, the Dow advanced 0.3% and the Nasdaq Composite added 1.4%.
Stock ETFs pared their weekly gains due to Friday’s downside move as the Dow shed more than 100 points.
“With such a staunch group in the House, it looks as if the odds of going into 2013 without a deal have increased,” Kevin Caron, a strategist at Stifel Nicolaus, told Bloomberg News. “I don’t know whether we’re going to reach a deal, when we’re going to reach a deal, if there’s going to be a deal. It’s just a complete wild card at this point.”
The CBOE Volatility Index was up more than 10% at one point Friday to nearly touch 20. Exchange traded products designed to track VIX futures contracts such as iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX), VelocityShares VIX Short-Term ETN (NYSEArca: VIIX), VelocityShares Daily 2x VIX Short-Term ETN (NYSEArca: TVIX) and ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) also rallied. [Volatility ETFs: Is TVIX Going to Zero?]